Raw Mineral Export Duty Dramatically Reduced to Incentivize Smelter Construction
On July 25, 2014, the Minister of Finance (MOF) dramatically reduced export duties on unrefined metal minerals for companies that are taking concrete action toward building smelting facilities.
MOF Regulation No. 153/PMK.011/2014 (“MOF 153/2014”) was drafted to address concerns raised by mining companies who are required to build smelting facilities while at the same time paying escalating export duty. Companies had argued that paying high export duty both undermined the profitability of their operations and drained potential funding for smelter investment.
♦ Past Export Provisions
Under the current set of regulations on mineral export,¹ metal minerals must be refined to a very high standard before they can be exported, but eight specific mining products (concentrates of copper, zinc, lead, and manganese, iron sand, iron ore, anode slime and copper telluride) are allowed to be exported with minimal processing. Mining companies who continue to export unrefined minerals must demonstrate their progress in developing a smelting facility to the Ministry of Energy and Mineral Resources (MEMR) and Ministry of Trade (MOT), and must also pay progressive export duties, with tariffs increasing from 20-25% in the first semester of 2014 to 60% on December 31, 2016,² after which all export must cease.
♦ Export Duty Reduced to 7.5%, 5% and 0% for Companies Developing Smelters
Under MOF 153/2014, export duty will be dramatically reduced in accordance with the stage of
project development:³
- Stage 1 = 7.5% export duty for progress up to 7.5%, including deposit of a “seriousness guarantee” of 5% of the project value
- Stage 2 = 5% export duty for progress of 7.5% - 30%
- Stage 3 = 0% export duty for progress beyond 30%
August 15, 2014,
Government Requires Construction Plan and Guarantee Funds in Order to Export Unrefined Metal Minerals
On April 17, 2014, the Minister of Energy and Mineral Resources (“MEMR”) issued Regulation No. 11 of 2014 on Procedures and Requirements for Granting Recommendations for Overseas Sales of Processed and Refined Mineral Products (“Regulation”) to implement Government Regulation No. 1 of 2014 and MEMR Regulation No. 1/2014 provisions on exporting mineral mining products.
The most powerful aspect of the Regulation is that it makes Export Approval recommendations for partially processed metal minerals¹ contingent upon applicants taking concrete action toward developing domestic refining facilities, including depositing funds as a “guarantee of seriousness” to follow through on smelter construction. It also reaffirms that partially processed metal minerals can only be exported until January 12, 2017, after which all metal minerals must be refined to meet legal purity standards.
♦ Obligated Parties and Mineral Products
All companies that intend to export mineral mining products must obtain recognition as a Registered Exporter (Exportir Terdaftar – ET) from the Ministry of Trade (“MOT”) and submit their shipments for survey by a licensed surveyor (see MEMR 1/2014). For companies that are allowed to export “processed” (i.e., not refined to stipulated standards) metal minerals (concentrates of copper, iron, tin, manganese, lead, and zinc) and byproducts (anode slime and copper telluride), Export Approval (Persetujuan Export – PE) from the MOT is also required for each proposed shipment. Export Approval is contingent upon a recommendation from the MEMR, while a recommendation for ET status is required from the institution that issued the exporter’s business license (generally, MEMR, except for refining companies holding an Industrial Business License (IUI) from the Ministry of Industry (“MOI”)²).
♦ Registered Exporter
To obtain a recommendation for Registered Exporter status, applicants³ must apply to the Director General of Minerals and Coal (“DGMC”) with copies of the clear and clean certificate, surveyor’s report, purchase agreement with overseas buyer, and other relevant documents. Applicants intending to export “processed” metal minerals and byproducts must also submit a statement certifying their intention to construct a domestic refining facility and a copy of the construction cooperation agreement if the smelter will be built in partnership with other parties.
♦ Export Approval
To obtain a recommendation for Export Approval for “processed” metal minerals and byproducts, applicants⁴ must apply to the DGMC with copies of Registered Exporter status, approved plan for construction of a domestic refining facility, proof of deposit of a “seriousness guarantee” to construct the refining facility, environmental performance documents (e.g., environmental compliance, air and water quality tests, reclamation plan, and reclamation guarantee), proof of payment of Non-Tax State Revenue (PNBP), annual work and budget plan (RKAB), and specific information on the intended export.
Export Approval recommendations are valid for six months and can be extended for six months at a time.
♦ Approval of Smelter Construction Plan
In order to obtain a recommendation for Export Approval , holders of Production Operation IUP, Production Operation specifically for Processing and/or Refining, Contract of Work and Industrial Business License must submit their domestic smelting facility construction plan for evaluation by a technical team of the DGMC. Without an approved construction plan, the applicant cannot obtain Export Approval, and to extend a valid Export Approval recommendation beyond the initial six months period, the DGMC must be satisfied with the applicant’s environmental performance and progress in realizing the construction plan. Progress will be reviewed every six months.
♦ Seriousness Guarantee (and release)
To obtain a recommendation for Export Approval, holders of Production Operation IUP, Production Operation IUP specifically for Processing and/or Refining, and Contract of Work must deposit funds into an escrow account at a State-owned bank as a “guarantee of seriousness” to build a domestic refining facility. The guarantee funds are calculated as 5% of the total investment (if new) or of the residual unrealized investment value (if the project is already underway). The funds may be released in annual increments in accordance with the progress of construction, but only if progress meets at least 60% of targets every 6 months. Repeated failure to meet construction targets can result in the government appropriating the guarantee funds for the State Treasury.
New Negative Investment List
The long-awaited revision of the 2010 Negative Investment List (2010 Daftar Negatif Investasi, or “2010 DNI”) was issued through Presidential Regulation No. 39 of 2014 on List of Business Fields Closed to Investment and Business Fields Open, with Conditions, to Investment, dated April 23, 2014 (“2014 DNI”), effective as of April 24, 2014. According to the Government, the 2014 DNI is intended to enhance investment in Indonesia and implement Indonesia’s commitment to the ASEAN Economic Community.
♦ The 2014 DNI
The 2014 DNI is grouped into (i) business fields closed to investment, and (ii) business fields open to investment, but subject to certain conditions, such as limitations on foreign shareholding or specifications regarding the type or scale of business that can conduct particular business activities.
Applicability and Grandfather Clause The 2014 DNI revokes the 2010 DNI. Regulations issued to implement the 2010 DNI remain valid as long as they do not conflict.
The 2014 DNI includes a grandfather clause in Article 9, stating that limitations on whether a business is closed or open with conditions (Articles 1 and 2) do not apply to investments approved before the issuance of the new DNI, unless the new DNI is more favorable to the particular investment.
In case of change of shareholding resulting from merger, acquisition or consolidation, Article 6 of the 2014 DNI provides that surviving and acquiring companies can continue to comply with whatever foreign shareholding limits were approved in their original BKPM approval, while new consolidated companies must follow the limitations that prevail at the time the consolidated entity is formed.
Despite the grandfather clause, sectoral laws and regulations can render the grandfather clause dysfunctional. Of particular note, the 2010 Horticulture Law set a maximum 30% limit on foreign capital in horticulture businesses (Article 100(3)) and required existing foreign investors to divest their shares down to 30% within 4 years after the enactment of the law (Article 131(2)). The deadline is approaching on November 24, 2014. Our recent consultation with BKPM indicates that, despite the DNI’s grandfather clause, all existing horticulture companies are required to comply with the divestment requirement; in other words, they will not be grandfathered. We understand that BKPM has suggested to the Agriculture ministry to create a divestment mechanism similar to the stepwise approach applied in the mining industry to make it more practical and less burdensome for horticulture companies; but to date, no mechanism has been announced.
♦ Changes and New Business Fields in the 2014 DNI
The following is a comparison of maximum foreign shareholding permitted under the 2010 and 2014 DNI’s.
♦ Limit on Distributorship: Problem for Wholesale Trading Companies
As indicated above, distributorship (no specific KBLI), which was not listed in the 2010 DNI, is now restricted to 33% foreign shareholding. According to BKPM, wholesale trading (perdagangan besar) is differentiated into (1) export (no foreign shareholding limitation), (2) import (no foreign shareholding limitation), and (3) distributorship (maximum 33% foreign shareholding). This apparently bars majority foreign-owned importers and exporters from carrying on any distributor roles or activities, but what precisely constitutes “distribution” has not been sufficiently explained. For example, does “distribution” refer specifically to transportation, or are wholesalers allowed to deliver their goods to buyers? It is also unresolved at this time whether “distribution” involves transfer of title to goods and the extent to which wholesalers can control third party distribution of their goods for quality control and safety purposes.
We understand that BKPM continues to receive inquiries and feedback from the public and that the question of distributorship will be further discussed between BKPM and the Ministry of Trade (“MoT”), given the substantial confusion surrounding this issue.
♦ Incentives for ASEAN Investors
The 2014 DNI provides several incentives for ASEAN investors, opening up more markets in advertising (51% foreign ownership) and market research, certain healthcare fields (up to 70% ownership of specialist/subspecialist hospitals, specialist clinics, and dental clinics located in most capital cities of eastern Indonesia), and international cargo and passenger shipping (60%), among others.
We understand that the concept of “ASEAN investor” would apply to companies registered in ASEAN countries, regardless of origin of shareholding. Thus, a Singapore-based company owned by Japanese investors would be eligible to enjoy the ASEAN investors’ incentives.
♦ Implications for Public Companies
As with the 2010 DNI, the 2014 DNI explicitly provides in Article 5 that Articles 1 and 2 (whether a business is closed or open with conditions) do not apply to indirect or portfolio investment transactions made through domestic capital markets. Unfortunately, this provision fails to address a number of practical issues, such as whether all listed companies are exempted from the DNI, or only publicly traded shares are exempted. Our recent consultation with BKPM indicates that the exemption is not absolute, and that certain circumstances may trigger DNI application to listed companies, although in practice this is rare. BKPM officers noted that it is unlikely that the DNI will be applied to a listed company unless the company itself informs or submits documents that display foreign shareholding to BKPM.
♦ Potential Conflict of DNI and Sectoral/Regional Regulations
Although the 2014 DNI clearly states that business fields not listed are unconditionally open for investment (Article 3), in reality there are several lines of business not listed in the DNI that have to comply with requirements and restrictions under other regulations.
Apart from the horticulture industry as highlighted earlier, in mining, for example, there are maximum foreign shareholding limits and divestment schedules stipulated in Regulations of the Minister of Energy & Mineral Resources (MEMR), which are not reflected in the DNI and which accelerate upon change of shareholder. Because BKPM requires a recommendation from MEMR before it can approve a transfer of shares in a mining company, MEMR is able to impose the shareholding limitation by virtue of its power to issue or withhold the recommendation.
As with the previous DNI, investors need to be mindful of sectoral or regional regulations that may impose additional requirements or limitations despite the 2014 DNI’s assurance in Article 3.
INTENSIVE TRAINING: PLANTATION LAW – Batch II
Mohamad Kadri will be one of the speakers on Intensive Training on Plantation Law, organized by Emli Training. The training will be held on June 11, 2014 at Grand Mercure Jakarta Harmoni, Jakarta, Indonesia.
Additional Sectors Covered under 2014 Sectoral Minimum Wage for DKI Jakarta
The Governor of DKI Jakarta Province stipulated new sectoral minimum wages (“UMSP”) in Governor Regulation No. 54 of 2014 dated April 17, 2014, and Governor Regulation No. 62 of 2014 dated April 28, 2014, on Provincial Sectoral Minimum Wage (together, the “UMSP Regulation”). The UMSP Regulation stipulates 16 industries and sectors that have to comply with the UMSP:
1. Cosmetic materials and products industry*
2. Automotive industry
3. Can packaging industry*
4. Pharmaceutical industry
5. Radio, television, voice and picture recording devices industry*
6. Household electrical appliance industry*
7. Hospital services*
8. Construction and public works
9. Chemicals, energy, and mining
10. Metals, electronics, and machinery
11. Insurance and banking
12. Food and beverages
13. Textiles, clothing, and leather
14. Tourism
15. Telecommunications
16. Retail
*newly added for 2014
The UMSP Regulation stipulates 2 types of UMSP: monthly and daily. The lowest monthly UMSP applies to the cosmetic materials and products industry, with a UMSP of Rp2,525,000, and the highest monthly UMSP applies to the automotive industry sub sector of four wheel vehicles, two wheel vehicles, and transportation and heavy vehicles industry, with a UMSP of Rp2,915,000. The lowest daily UMSP applies to the construction and general contractor industry, with the lowest UMSP applied to workers (knek), mower men (tukang babat rumput) and plumbers (tukang pasang pipa) with a UMSP of Rp102,920 per day, while the highest daily UMSP applies to Supervisors and operators of heavy equipment, with a UMSP of Rp157,901 per day.
It is mandatory for every employer in DKI Jakarta Province that engages in the foregoing sectors to comply with the UMSP for all employees whose tenure is less than 1 year, in accordance with Article 90 of the Labor Law and the UMSP Regulation. If the tenure is more than 1 year, the monthly or daily salary shall be determined through bipartite negotiation between the employee or authorized labor union and the employer.
Jakarta
May 21, 2014
ALB Indonesia 2014 - In-House Legal Summit
AKSET sponsors the ALB Indonesia In-house Legal Summit on May 7, 2014 in Jakarta
In Partnership with 4 others law firms from Jakarta, AKSET sponsors a summit with Johannes C. Sahetapy-Engel as Moderator and Abadi Abi Tisnadisastra as a Panelist in Investing in Indonesia: Maximizing Your Investment in the Face of Regulatory Uncertainty. They will discuss the foreign ownership restrictions, divestment and nationalization, and related issues.
SMELTER NICKEL BUSINESS PROFILE
Arfidea D. Saraswati will be one of the speakers on in-house training of Smelter Nickel Business Profile, organized by BIDS Consultant collaborating with PT Bank Mandiri (Persero). The training will be held on April 24, 2014 at Gedung Learning Center Group PT Bank Mandiri (Persero) Tbk, Jakarta, Indonesia.
New MOLHR Procedures for Raticication of Legal Entities, Amendment of AoA and Company Data
On March 26, 2014, the Minister of Law and Human Rights (“MOLHR”) issued regulation No. 4 of 2014 (“Regulation”) on Procedures for Applications for Ratification of Legal Entities and Approval and Notification of Amendments of Limited Liability Companies’ Articles of Association, which revokes the previous regulation issued in 2011.
Company filings must now be submitted electronically to the MOLHR through the Legal Entity Administration System (Sistem Administrasi Badan Hukum – “SABH”, formerly called Sisminbakum), although hardcopy submission is permitted in situations where an internet connection is not available.
Following are the highlights of the updated procedures.
♦ Approval of Company Name
To reserve the name of a new company, a nonrefundable administration fee must be paid to an appointed bank before submitting the Company Name Submission Form (previously, the fee was paid only after the company name was approved). Once the fee is paid, the company has 60 days to submit its application through the SABH for approval by the MOLHR. Once the name is approved, the name will be reserved for the company for 60 days thereafter.
♦ Ratification of Legal Entities
To validate the company as a legal entity, within 60 days after execution of the Deed of Establishment, a Company Incorporation Form must be submitted through the SABH, along with an electronic statement letter from the applicant attesting to the sufficiency of all supporting documents.
Once the MOLHR issues a decree ratifying the legal entity, the decree can be printed directly from the system (using 80 gram F4/folio white paper) by a Notary Public, who must sign and chop the decree with their Notary stamp, including the phrase, “Keputusan Menteri ini dicetak dari SABH” (This Decree is printed from SABH).
Amendments of a company’s Articles of Association (AOA) and certain company data must be submitted for approval or notification through the SABH using an Amendment Form. The Regulation unifies the application forms for both approval and notification triggered by amendment of AOA provisions or company data.
As under the previous regulation, the following AOA amendments must obtain approval from the MOLHR:
- Company name or domicile
- Company purpose, objectives and business activities
- Lifespan of the company (for companies established for a limited period of time)
- Authorized capital
- Reduction of issued and paid-up capital
- Change of status – going public or delisting
If an amendment is approved by the company’s shareholders in the form of a Unanimous Written Resolution of the Shareholders, the resolution must be drawn up in a notarial deed within 30 days, as only a notarial deed can be submitted to the MOLHR to validate an amendment of the AOA.
Other types of amendments and changes of company information only need to be notified to the MOLHR:
- Names and composition of shareholders
- Names and composition of Board of Directors
- Company address
- Dissolution of company or expiration of company lifespan
- Termination of legal entity status due to liquidation/bankruptcy
- Merger, consolidation, acquisition and separation which are not followed by amendment(s) to the company’s AOA
Of note, the Regulation adds deeds of consolidation and acquisition to the list of supporting documents that must be attached when submitting an amendment of the company’s AOA or company data, whereas the previous regulation only required deeds in case of merger.
2nd Annual Indonesia HR & Employment Law
Johannes C. Sahetapy-Engel will be one of the speakers on the 2nd Annual Indonesia HR & Employment Law, organized by Clariden Global Executive Education. The event will be held on March 26, 2014 at Shangri-La Hotel, Bandung, Indonesia.
Enactment Of New Trade Law
The House of Representatives (Dewan Perwakilan Rakyat – “DPR”) passed the long-awaited Bill on Trade on February 11, 2014. For the previous 80 years, Indonesia had relied on the Bedrijfsreglementerings Ordonnantie 1934 from the Dutch colonial period, along with a set of ministerial implementing regulations.
Following are highlights of the key provisions.
IMPORT AND EXPORT
The Trade Law reaffirms the import and export requirements previously scattered across various regulations, including the requirements to obtain Importer Identification Number (Angka Pengenal Importir – API) and Registered Exporter (Exportir Terdaftar – ET) status.
Any goods may be imported or exported unless specifically prohibited, restricted, or stipulated otherwise by law. The Government can restrict import or export of goods to (a) protect national safety or public interest, including social, cultural, and moral welfare; (b) protect intellectual property rights; or (c) protect the health and safety of humans, animals, fish, plants and the environment.
The Government may limit export in order to (see Art. 54):
a. ensure fulfillment of domestic needs
b. ensure availability of raw materials for domestic processing industries
c. protect sustainability of natural resources
d. increase economic value of raw materials and natural resources
e. anticipate price fluctuations of export commodities on the international market
f. maintain domestic price stability of certain commodities
As for imports, the Government may limit importation of particular goods to expedite the growth of, establish, and protect domestic industries or to maintain the balance of payments and balance of trade. In general, importers can only import new goods, except for certain used capital goods under specific circumstances and with permission from the Minister of Trade.
STANDARDIZATION
All goods traded on the domestic market must bear labels in Indonesian language and must satisfy Indonesian National Standards (Standar Nasional Indonesia – “SNI”) requirements (or other mandatory technical requirements) by affixing the SNI sign or a conformity sign/certificate recognized by the Government.
Standardization also applies to services, including business services; distribution; communications; education; environmental services; financial services; construction and technical services; health and social services; tourism, recreation, cultural, and sports services; transportation; and other services. Service providers must comply with SNI requirements.
E-COMMERCE
Electronic trading transactions must observe and comply with the Electronic Information and Transaction Law, and enterprises that trade goods or services by way of e-commerce must provide complete and accurate information on the traded goods/services, comprising at least the enterprise’s identity and legality as producer or distributor; technical specifications of goods; technical specifications or qualifications of services; price and terms of payment; and terms of delivery. Enterprises that fail to provide complete and accurate information may have their trading license revoked.
INTERNATIONAL TRADE AGREEMENTS
Under Law No. 24 of 2000 on International Agreements, the Minister of Foreign Affairs must consult with the DPR for preparation and ratification of international agreements impacting the public interest. Article 10 of Law 24/2000 stipulates that ratification of an international agreement must be done through a law (Undang-undang) passed by the DPR if the agreement relates to (a) politics, peace, defense, or national security; (b) change or stipulation of the territory of the Republic of Indonesia; (c) state sovereignty; (d) human rights and environment; (e) a new principle of law (kaidah hukum baru); or (f) foreign loans or grants. Law 24/2000 does not specifically mention international trade agreements.
The Trade Law creates a significant role for the DPR, which now has rights of consultation and approval over trade agreements that impact the national interest and must refuse to ratify agreements that put the national interest at risk. If the agreement causes a “systemic impact” on the citizens’ livelihood, relates to the State’s financial burden, or requires amendments to or enactment of laws, then the agreement must be ratified through a Law (which requires approval by the DPR and signature by the President). In the absence of such systemic impact, ratification is permitted by means of a Presidential Regulation. This protocol is consistent with Law 24/2000.
The Trade Law does not define or elaborate on systemic impact or national interest risk. It is also unclear from the wording of the relevant article whether the consultation with the DPR is mandatory or optional and whether it is required for all, or just some, international trade agreements.
NATIONAL TRADE COMMITTEE
The Trade Law establishes a National Trade Committee (Komite Perdagangan Nasional – “KPN”), which will be established by the President and headed by the Minister of Trade. Membership of the KPN comprises elements from the Government; institutions responsible for investigating antidumping and reward measures; institutions responsible for investigating trade security measures; institutions responsible for providing recommendations on consumer protection; the business community; and academicians or experts in trade.
The KPN will assist the Government by providing input on trade policy and regulations, trade funding, antidumping, reward and trade security measures, and domestic and international trade issues; monitoring trade policy in partner countries; and helping to formulate the Government’s position in international trade negotiations, among other functions.
DIRECT SELLING AND MULTI-LEVEL MARKETING
The Trade Law specifically bans pyramid scheme—also known as multi-level marketing or MLM—distribution systems, with criminal penalties for violators. There are also provisions on direct selling, which is the sale of goods directly to end users without a fixed retail location. Goods subject to exclusive distribution rights using the direct selling method can only be marketed by official sellers registered as members of direct selling companies. [Direct selling is governed under Minister of Trade (“MOT”) Regulation No. 32/M-DAG/PER/8/2008 as amended by MOT Regulation No. 47/M-DAG/PER/9/2009.]
SANCTIONS
Apart from administrative sanctions, the Trade Law provides stiff criminal sanctions for violations of certain requirements and restrictions. Maximum penalties include:
- Indonesian language label requirement: five years imprisonment and/or fine up to five billion Rupiah
- Pyramid scheme: ten years imprisonment and/or fine up to ten billion Rupiah
- Carrying on trade activities without proper licenses: four years imprisonment and/or fine up to ten billion Rupiah
- Stockpiling: five years imprisonment and/or fine up to fifty billion Rupiah
- Manipulation of data or information on staple or important goods: four years imprisonment and/or fine up to ten billion Rupiah
- Trading unregistered security, safety, health and environment-related goods: one year imprisonment and/or fine up to five billion Rupiah
- Trading prohibited goods: five years imprisonment and/or fine up to five billion Rupiah
- Importing used goods: five years imprisonment and/or fine up to five billion Rupiah
- Export or import of prohibited goods: five years imprisonment and/or fine up to five billion Rupiah
- Provision of services not in compliance with SNI, technical or qualification requirements: five years imprisonment and/or fine up to five billion Rupiah
- Trading goods or services through e-commerce not in line with provided information: twelve years imprisonment and/or fine up to twelve billion Rupiah
- Holding trade shows involving foreign participants or products without a license from MOT: three years imprisonment and/or fine up to five billion Rupiah
Full implementation of the Trade Law will require implementing instruments in the form of Government Regulations, Presidential Decrees, and Ministerial Regulations, as specified in the relevant provisions of the Law.